ACA, Copia Clash Over Plan for Creditors

Lawyers for bond insurer ACA Financial Guaranty Corp., bankrupt nonprofit Copia: The America Center for Wine, Food, and the Arts, and creditors continued to battle this week over what plans should be submitted to creditors in the bankruptcy case.

The latest legal filings come ahead of a hearing scheduled to be held tomorrow at 10 a.m. in the U.S. Bankruptcy Court in the Northern District of California.

On behalf of ACA, lawyers from Nixon Peabody LLP late last week filed a motion opposing a financing agreement Copia submitted in March with one of the creditors. ACA learned only on the date the most recent plan was filed that Copia had decided to scrap an earlier plan it had made with the bond insurer to work out an agreement with creditor Copia Claims LLC, ACA's lawyers wrote.

In that March nonrecourse financing plan, creditor Copia Claims - which purchased a $12,000 unsecured debt for $4,000 after the bankruptcy filing - would provide $1.35 million in debtor-in-possession financing to the estate. If approved by the judge, Copia would get $350,000 just for allowing creditors to vote on the plan and another $1 million if the creditors confirm it.

If the judge approves the financing agreement, Copia Claims would have the right to submit a plan to creditors that would include pursuing a fraudulent transfer claim that seeks to recover for the entire Copia estate $65 million held in escrow for the 1999 bondholders. Copia Claims argues there was a "badly mishandled and unlawful" escrow deposit when the bonds were refunded in 2007.

Copia Claims said the 2007 bondholders would want to pursue the fraudulent transfer claim because without it, they have just the secured collateral and a guarantee from ACA that it will pay all interest and principal, which is of uncertain value given the insurer's financial condition.

As of Dec. 31, ACA had $101 million in policyholders' surplus and $74 million in contingent capital remaining, and has reported it could lose between $40 million and $50 million on a present-value basis on the Copia deal. ACA has more than $6.6 billion in public finance guarantees outstanding.

But ACA's lawyers argued against Copia Claims' proposal, saying its own proposed settlement will pay out more to unsecured creditors, that the financing agreement breaches existing terms and conditions, and that ACA has the right to vote on any reorganization. Copia Claims had said the 2007 bondholders should get a chance to vote on any plan directly because ACA has a conflict of interest - it has obligations to both the 1999 and 2007 bondholders - and an "effectively insolvent" financial condition.

ACA's lawyers say that even if there actually were a fraudulent transfer, the only parties that would gain are Copia Claims, which it calls the McGrane Group, and its lawyers, McGrane Greenfield LLP and Venable LLP. Copia Claims has misrepresented the potential outcome because while 2007 bondholders would get to share in the trust, they would lose the collateral to the 1999 bondholders, ACA's lawyers say.

Only Copia Claims and its lawyers would benefit from a winning lawsuit, reaping about $16.35 million, ACA's filing estimates. Under the proposed plan, Copia Claims would be eligible to receive as much as 20% of any recoveries from the fraudulent transfer lawsuit plus any lawyer fees.

"This is a classic example of the one-sided nature of the proposed financing agreement and further exposes an indisputable fact: only the McGrane Group and the professionals associated with it stand to benefit from the proposed financing agreement or from a potential unwinding of the defeasance transaction," ACA lawyers wrote, referring to the lack of oversight with regard to attorney fees in the proposal.

Copia Claims this week struck back, arguing that in exchange for the right to submit its plans to creditors, it has offered to pay $350,000 up front that it can't get back.

"Taking CC's money and paying debtors' immediate and most pressing bills with that money simply cannot be wrong under the circumstances of this case," Copia Claims wrote. "After that, CC is simply at the mercy of the bankruptcy court, where it will happily take its chances based on confidence, born of experience, that this bankruptcy court will always do the right thing when given all the facts and law applicable to a given situation."

Copia Claims said ACA's lawyers also misrepresent payouts in the event of a victory in the fraudulent transfer lawsuit, because the 2007 bondholders would get $24 million in cash plus the secured collateral. Copia wrote in a proposed disclosure statement that the 2007 bondholders only stand to see more cash available to pay off claims as a result of the litigation, which "cannot possibly reduce amounts otherwise available to pay '07 bondholders."

In its own filing supporting the proposed financing agreement, Copia said ACA's proposal is inferior to Copia Claims' offer of financing and willingness to pursue litigation at its own cost. Copia also says it must notify the 2007 bondholders directly about any plans, because it has no assurances ACA can actually meet its obligations.

Copia Claims also noted that its lawyer William McGrane does have relatives with a minority interest in Copia Claims, but refused to respond to the "ad hominem" attacks contained in ACA's filing.

"As previously indicated, Copia Claims believes bankruptcy claims trading, done honestly, is not a bad thing and stands by that position here," Copia Claims wrote.

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